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Many of you have probably heard the recent battle going on in New York City over having enough
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revenue to provide services that the citizens of the city need. Mayor Zoran Mondani has looked at
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a variety of different options. The latest is a tax on people who have a second home in the city,
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but that is bringing blowback from those individuals, one of which is Citadel CEO Ken
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Griffin. So is there a solution to try and raise revenue but do it in a manner that does not kill
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the tax base and see people either move out of New York or sell their second home? Robert Inman
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is a professor emeritus of finance at the Wharton School and he has written about a potential idea.
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Bob, great to meet you and great to talk and thanks very much for your time today.
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Oh, you're welcome, Dan. Happy to chat.
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Thank you. All right, so obviously revenue from taxes is a big issue. The article that you wrote
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talks about, or the components that you wrote about, talks about infrastructure and
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land being one of the areas that maybe cities should consider.
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Well, I agree. It's an idea that's been around for a long, long time,
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actually started by Henry George, who was a Philadelphian back in 1900. The basic idea when
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you do taxes is, and it's really quite simple, you want to do A, raise your money, and B,
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do the least damage you can to the private economy as you raise your money.
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The choices that the mayor has been given initially all really do have fairly significant
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effects on the New York City economy. And certainly, as you said, the blowback he gets
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with these alternative proposals, property tax being one of his earliest proposals,
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is going to have big, significant implications for one of the issues he cares most about,
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which is quality of housing and structure. When you tax property, people are going to
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take less time to maintain and repair their property. The other options are sales taxes,
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which of course is going to impact consumption, and then income taxes, which New York has been
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living with for a long time, and that's going to lead to impact on worker effort,
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and perhaps most importantly, people leaving the city for suburban living. In fact, I'll just
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quickly mention, Dan, because it was striking to me, New York introduced the wage tax back in 1969.
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Stanford, Connecticut, and Greenwich, Connecticut, were country commuting towns.
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Ten years later, they were major financial centers. And why is that? Because people who
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were doing finance wanted to avoid the wage tax. They moved out of the city and stayed close to job
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by recreating a new financial center in Stanford and Connecticut. So, when I teach this stuff to
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my students, I say, just drive on I-95, and you'll see the implications of the wage tax.
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All right. So, taxing the land, though, how does that actually kind of come about
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and benefit a city? One of the examples I saw talked about is Pittsburgh has been doing this
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for a long time. Yep. And with great success. Land is the one thing that can't move.
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So, there it is. And if you tax land or the value of the land, you can raise your money,
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but the land stays in place. And so, it's going to be, by definition, the one that does the least
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damage in terms of mobility to the economy. And Pittsburgh's been doing this now. It began
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in the late 1970s. There was a major recession in 1970, and Pittsburgh's money was badly squeezed.
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They were looking for new sources, and they made a decision. The tax structure in Pittsburgh,
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and which is true for New York as well, allows you to separate the tax rate on structures,
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buildings, bedrooms, bathrooms, and the like, from the tax on land. And what Pittsburgh did
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was to raise the land part of the tax and hold the structure part fixed. And that put more of
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the new burden of the tax onto land. The implication was, in the study that was done
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by colleagues at the University of Maryland, of the 25 or 30 Midwest industrial cities that
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they compared Pittsburgh to, Pittsburgh was the only city that grew from 1979 through 1995 when
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they completed their study. And why was that? Because the thing that was discouraging growth,
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taxes on structures, was now gone, or significantly less. And all new revenues came from tax on land,
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which couldn't move. And the implication really was, if anybody's been to Pittsburgh recently,
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a major transformation of the city. Yeah, it's kind of amazing to see what's happened to Pittsburgh
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in the last three decades or so. And obviously, by doing that, they've been able to provide all
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of the services that they need for the citizens there, correct? Absolutely. And importantly so,
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for the new businesses that were coming in, the IT from Carnegie Mellon, the medical centers from
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the University of Pittsburgh Medical Center, high-tech infrastructure kinds of buildings,
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which, by the way, are pretty mobile. But they had an incentive now to come into Pittsburgh
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because they were going to be taxed at a much, much lower rate relative to their alternatives.
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Are there any legal reasons, you know, in how the charters of New York City are set up
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that would prevent them from taking this approach? No. My colleague in our piece,
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Michael Knoll at our law school, Michael's an expert on the structure of tax laws. And
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New York does allow for the separation of tax rates on land and on structures. So you could
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have, just as a simple example, have a tax rate on structures that might be 1 percent,
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but a tax rate on land that might be 3 or 4 percent. And so you can separate the tax rates
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and get essentially the same effect that we're shooting for with a pure land tax.
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And there's no instance, realistically, where that tax kind of being incorporated
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into the component of the land gets passed down to the consumer down the road?
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No, because the easiest way for me to think about it is there's always somebody sitting
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on the fence to come in or come out. And a simple example would be, suppose I'm willing
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to pay $100 to be at this particular location to use this piece of land. And you tax, you say to me,
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the potential users of the land, I'm going to tax you $100. And I say, well, I'm going to leave.
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Well, the guy who owns the land was making $100 from my rents, subtracting his costs,
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he's making $80. So he could bear the burden of the tax. So the way I think about taxes,
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who can't leave is the guy who pays the tax. I'm the user of the land, I can leave,
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I can go to Connecticut. But the owner of the land is going to have to stay in place,
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and he eventually or she eventually will be the one who pays the tax.
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I should mention just quickly, you can design the tax so it isn't a tax on residential homeowners,
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but a tax on commercial property, industrial property, you can pick your taxpayer. And so
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it need not be a burden on the lower and middle income families of the city, but rather the
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industrial and commercial places. And that would just basically work off how the zoning is set up
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already in a lot of these communities, right? Exactly, exactly. So is there any reason why
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this approach hasn't been tried before in New York?
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In New York, I don't know the answer to that. I think more generally, the issue is
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administration of the tax seems complicated, because you're going to have to separate the
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value from the structure from the value of the land. But in the case of Pittsburgh,
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there was a lot of vacant land. And so you have a one building with a structure and one building with
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no structure, you have the value of the land right there waiting to be done. You can do it
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administratively and accounting wise, even if you don't have vacant land, but typically vacant land
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is the benchmark that you'll use. And the potential downside risk is obviously what we're
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seeing play out. It seems like with Mr. Griffin, who's talking about moving a lot of his offices
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for Citadel down to Miami, you're talking about the potential of losing a significant amount of
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revenue by going the route that Mayor Mondani is going rather than potentially looking at
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this avenue of taxing the land. Oh, absolutely. Because the owner of the land has an incentive
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to stay as long as the profits they make off owning that land is less than the tax.
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And you may as well stay in New York and continue to reap the benefits of the agglomeration
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advantages of the city. Right. Bob, great to talk with you. Thanks for your insight. All the best.
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Look forward to talking to you again. Great. Thanks, Dan. Thank you. Robert Inman,
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who is a professor emeritus of finance here at the Wharton School.
